Can India reform its telecom market and save Vodafone Idea in the process?

Just as Vodafone Idea Ltd. was about to drown under the weight of its $30 billion debt, India has thrown a lifeline to the U.K. operator’s local joint venture. The rescue is only one of the tea leaves Group CEO Nick Read will read as he weighs the all-important question: Has India stopped being what Deutsche Bank AG analysts recently described as “the most painful market” to operate a telecom? The answer will decide if it’s time to make a fresh play for the 1.4-billion-person market.

A moratorium on New Delhi’s bloated back-fee claims, extra time to pay for the spectrum purchased in past auctions, and a relief from onerous bank guarantees add up to at least 316 billion rupees ($4.3 billion) in liquidity support, according to Investec Capital Services. That would keep Vodafone Idea going, though stabilizing a business that has lost more than a third of its 400 million-plus subscribers in three years will need a lighter debt load, and a thicker equity cushion. In other words, a true revival will require an optimistic view of the future.

That may be hard to muster given the industry’s checkered past. The unfailing regularity with which India has sprung negative surprises on its wireless firms will make it hard for Read — and his board — to be persuaded that this time may be different.

Investors like Norway’s Telenor ASA, which had entered India a little later than Vodafone, got burned when the country’s Supreme Court canceled 122 telecom licenses in one fell swoop in 2012, suspecting irregularities in their award. This was also when New Delhi, after losing a tax case against Vodafone, retrospectively changed the law to hound the operator with a $3 billion demand. That messy quarrel dragged on until an international arbitration panel threw out the government’s claim last year; it destroyed the firm’s chances of going public in India.

Then five years ago, Mukesh Ambani, India’s richest man, upended the economics of the business by entering the fray with free voice calls and cheap data. A field of a dozen operators effectively shrank to just three. To survive, Vodafone merged its network with Indian billionaire Kumar Mangalam Birla’s publicly traded Idea Cellular Ltd., creating what was then the country’s largest wireless service.

But it got whacked again. The industry and the government had been at loggerheads over the definition of the revenue that had to be shared with New Delhi under India’s 1999 telecom policy. In 2019, the Supreme Court upheld the government’s very broad claim, which included all sorts of non-telecom revenue. The burden of past dues, which came to $7.8 billion in Vodafone Idea’s case, threatened to sink it. With neither of its two main equity partners wanting to throw more good money after bad, it looked like banks would have to take haircuts and the government might have to nationalize the operator to prevent the market from turning into a duopoly, led by Ambani.

The rescue has averted that fate. As part of the plan, New Delhi is prepared to take equity. But only in lieu of interest payments in case Vodafone chooses the option of paying its dues later. There’s no reduction in the debt load. In fact, the bailout may give a leg up to Bharti Airtel Ltd., the No. 2 player.

As Investec says, its investment in Indus Towers Ltd. — India’s largest owner of mobile towers — will now dodge the hit it would have taken had Vodafone Idea, a key tenant, run out of cash. Besides, Bharti will also qualify for all the concessions. Yes, it would have won a whole lot of customers in one shot had Vodafone gone under. But some of them will migrate to it anyway.

For the 255 million Vodafone Idea customers who’re still sticking around, it’s not enough to know that improved liquidity will allow their telco to survive. Can it invest aggressively enough to give them a good 4G service now, and 5G later? For employees, too, it will be important to have confidence in the firm’s long-term survival. That’s where Read enters the picture. Courts won’t allow the government to revisit the past, but the bailout package promises a narrower definition of revenue in determining the government’s take in the future. Read is also being told that 100% foreign ownership is fine, with no prior approvals required. Will Vodafone, together perhaps with some deep-pocketed private equity firms, buy Birla’s shares and take control?

Setting off on an Indian adventure all over again is a daunting — but tempting — prospect. Demand for data is exploding amid growing smartphone use and rapid digitization. Also, India has finally consigned retrospective taxation to where the awful idea always belonged: the trash can. These are all encouraging signs, and even Bharti Airtel Chairman Sunil Mittal is coaxing his rival Read to grab the precious opportunity and “retake what has been a lost cause.” For the economics to improve, though, Ambani’s Jio Infocomm — the new leader — has to call off the brutal price war. Operators need to garner at least $3 from an average customer every month; right now, Vodafone isn’t even making half as much.

But all that’s well into the future. For now, global investors are afraid to look at the blue skies of Indian telecom, lest the ground under their feet turn out to be quicksand. Read can change that.